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Conversation With History is back with few months backlog of videos of interview with characteristically eminent scholars and people of insight uploaded to a refurbished site. Listened to Adam Segal’s interview yesterday, it was a great overview of the US-China-India political economy landscape, from an American perspective. Should check it out. Its layperson friendly. [Youtube=http://www.youtube.com/watch?v=vSAoOMgNLpQ]

The US as the preponderant state of our time has been a stabilizing force in the capitalist world economy, acting consistently with Kindleberger‘s hegemonic stability theory. Which is for the US to provide “market for ‘distress goods’ and a steady flow of capital. The hegemon must also manage the structure of foreign-exchange rates and provide a degree of coordination of domestic monetary policies.” (source). After the Second World War, the US has kept recessions relatively short and painless. Whenever the capitalist world economy falls into recession, trigger by whatever causes, the US will lossen monetary policy, inject liquidity and the US will consume and invest the capitalist world economy back into growth. For 50 years, America were willing and able. However time have changed.

US share of world GDP since 1980

US share of world economy is declining in both nominal and purchasing power parity (PPP). In the coming February when University of Pennsylvania update its Penn World Tables (a collection of comparative economic data) it will make some corrective adjustments which according to Arvind Subramanian from Peterson Institute for International Economics will result in China overtaking United States as having the worlds largest GDP measure by PPP. This is inevitable, as globalization intensifies, developed countries will no long able to maintain economic size that is significantly disproportionate for its population size.

Even though, this is mostly a good thing, as it means quality of life in some developing countries are catching up to the developed countries, shrinking relative economy size will also diminish America’s will and ability to carry on as the hegemon. America can no longer unilaterally pull the global economy out recession, it will have to coordinate with China and to a lesser extend other major economies of the world,

With this understanding, the G20s coordinated their response to the 2008 near-depression. And China perhaps aware of its new weight in the globalized economy announced a historic stimulus package that amounts to 16% of its GDP. The depression is avoid largely because of this.

Going forward, The US and China together accounting for almost half of world economy (PPP wise, and EU without fiscal consolidation dont count) have to work together as a paired oxymoronic duo-hegemons, or “Chimerica 2.0″ if you will, to moderate world economy. Sino-US is now the most importantly bilateral relationship in the world, lets hope they plays well together.

PS. as an English and Mandarin speaker, my market value just appreciated.

“Wall Street seduced the economics profession not through overt corruption, but by aligning the incentives of economists with its own. It was very easy for academic economists to move from universities to central banks to hedge funds—a tightly knit world in which everyone shared the same views about the self-regulating and beneficial effects of open capital markets. The alliance was enormously profitable for everyone: The academics got big consulting fees, and Wall Street got legitimacy. And it has kept the system going despite the enormous policy failures it has generated, not to exclude the recent crisis.”

Throughout the post second world war period, America’s economy played the role of a shock absorber to the global economy by being the spender of the last resort. Now, with the government and private American in debt, it is up to the savers of foreign currency reserve to spend. (i put China in the title because they are the largest holder of foreign reserves.) These savers has been buying huge stockpiles of American debt partly for the purpose of keeping their currency cheap to encourage Americans to buy their export. Its time to spend what they have saved by cashing in their American debt to buy American export.

Buying American Export will kill 2 birds with one stone. Since many savers are developing countries where there are many opportunities to gain productivity (and living standard) by investing and spending. The productivity gain alone can easily pay for the initial investment, result in few or no debt in the long run. This is lest true for developed countries that are already sitting on the technological frontier, and are thus at the inefficient end of diminishing return scale.

Buying American, will mean that the American government wont have to embrace the Keynesian option of trying to raise even more debt to spend their way of a recession, again. It will selectively boost America’s most competitive industry while reducing American debt and spread confident all around.

Why is there no sign of this happening? A lot of this has to do with the other rational for the build up of foreign reserves by the savers. Namely, to accumulate enough dollar to counter any excessive devaluation of their currency. In current crisis, the savers are even less likely to spend their savings, without which the savers would be vulnerable to currency fluctuation.

End game. In order for the savers to be comfortable enough to spend their savings, two things need to happen. (1) a coordinated spending plan with the participation of all major dollar holders and (2) a guarantee to bail out in case of excessive currency devaluation by stronger and more independent IMF would be needed.

G-20 participants announced a tripling of loans available to the International Monetary Fund, to $750 billion, a $250 billion expansion in a special IMF fund to help members\’ foreign exchange reserves, and $250 billion to the IMF to support trade. They also agreed to sell IMF-held gold to poor countries.

Thats an okey amount of money, but the point is that they prove that they are willing to use IMF and WB and they are willing to put resources into it. However whether this will be enough to get the savers to start spending will depend a lot on how exactly this money will be use, and who will have power over it. I personally knows too little about the inner working of the IMF and WB to offer any insight.

UPDATE 090405: World Wad
A world currency is another way to reduce currency shocks, naturally. SDR, if its rely upon more. SDR has a chance to become a predecessor to a new world currency, just like ECU is to Euro. Lets hope so.